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The membership warehouse concept was pioneered by discount merchandising sage Sol Price, who opened the first Price Club in a converted airplane hangar on Morena Boulevard in San Diego in 1976. Tài liệu giúp bạn tham khảo ôn tập và đạt kết quả cao. Mời bạn đọc đón xem!
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lOMoARcPSD| 49551302 CASE Costco Wholesale in : Mission, Business Model, and Strategy ® Arthur A. Thompson Jr.
employees, 200,000 members, and a $1 million
profit. Years earlier, Sol Price had experimented The University of Alabama
with discount retailing at a San Diego store called
Fed-Mart. Jim Sinegal got his start in retailing at
ight years after turning the leadership of Costco
the age of 18, loading mattresses for $1.25 an
Wholesale over to a new CEO, Jim Sinegal,
hour at Fed-Mart while attending San Diego
ECo stco’s co-founder and chief executive officer Community College. When Sol Price sold Fed-
(CEO) from 1983 until year-end 2011, had ample
Mart, Sinegal left with Price to help him start the
reason to be pleased with the company’s ongoing
San Diego Price Club store; within a few years, Sol
revenue growth and competitive standing as one of the
Price’s Price Club emerged as the unchallenged world’s biggest and best consumer goods
leader in member warehouse retailing, with
merchandisers. Sinegal had been the driving force
stores operating primarily on the West Coast.
behind Costco’s 37-year evolution from a startup
Although Price originally conceived Price Club
entrepreneurial venture into the third largest retailer
as a place where small local businesses could
in the United States and the world (behind Wal-Mart
obtain needed merchandise at economical prices,
and Amazon.com) and the undisputed leader of the
he soon concluded that his fledgling operation
discount warehouse and wholesale club segment of
could achieve far greater sales volumes and gain
the North American retailing industry. Since January
buying clout with suppliers by also granting
2012, when then-president Craig Jelinek took the reins
membership to individuals— a conclusion that
as Costco Wholesale’s president and CEO, the company
launched the deep-discount warehouse club
had prospered, growing from annual revenues of $89
industry on a steep growth curve.
billion and 598 membership warehouses at year-end
When Sinegal was 26, Sol Price made him the
fiscal 2011 to annual revenues of $152.7 billion and 782
manager of the original San Diego store, which
membership warehouses at year-end fiscal 2019
had become unprofitable. Price saw that Sinegal
(September 1, 2019). Costco’s growth continued in the
had a special knack for discount retailing and for
first six months of fiscal 2020; six-month revenues were
spotting what a store was doing wrong (usually
$76.1 billion, up 8.0 percent over the first six months of
either not being in the right merchandise
fiscal 2019, and the company had opened five
categories or not selling items at the right price
additional warehouses as of April 2020. As of March
points)—the very things that Sol Price was good
2020, Costco had continued to maintain its ranking as
at and that were at the root of Price Club’s
the third largest retailer in both the United States and
growing success in the marketplace. Sinegal soon the world.
got the San Diego store back into the black. Over
the next several years, Sinegal continued to build
his prowess and talents for discount COMPANY BACKGROUND
The membership warehouse concept was pioneered by
Copyright ©2021 by Arthur A. Thompson. All rights reserved.
discount merchandising sage Sol Price, who opened the
merchandising. He mirrored Sol Price’s attention
first Price Club in a converted airplane hangar on
to detail and absorbed all the nuances and
Morena Boulevard in San Diego in 1976.
subtleties of his mentor’s style of operating—
Price Club lost $750,000 in its first year of
constantly improving store operations, keeping
operation, but by 1979 it had two stores, 900
operating costs and overhead low, stocking items
that moved quickly, and charging ultra-low prices lOMoARcPSD| 49551302
that kept customers coming back to shop.
own phone, once telling ABC News reporters, “If
Realizing that he had mastered the tricks of
a customer’s calling and they have a gripe, don’t
running a successful membership warehouse
you think they kind of enjoy the fact that I picked
business from Sol Price, Sinegal decided to leave
up the phone and talked to them?”1
Price Club and form his own warehouse club
Sinegal spent considerable time touring Costco operation.
stores, using the company plane to fly from location to
Sinegal and Seattle entrepreneur Jeff
location and sometimes visiting eight to 10 stores daily
Brotman founded Costco, and the first Costco
(the record for a single day was 12). Treated like a
store began operations in Seattle in 1983—the
celebrity when he appeared at a store (the news “Jim’s
same year that Walmart launched its warehouse
in the store” spread quickly), Sinegal made a point of
membership format, Sam’s Club. By the end of
greeting store employees. He observed, “The
1984, there were nine Costco stores in five states
employees know that I want to say hello to them,
serving over 200,000 members. In December
because I like them. We have said from the very
1985, Costco became a public company, selling
beginning: ‘We’re going to be a company that’s on a
shares to the public and raising additional capital
first-name basis with everyone.’”2 Employees
for expansion. Costco became the first ever U.S.
genuinely seemed to like Sinegal. He talked quietly, in
company to reach $1 billion in sales in less than
a commonsensical manner that suggested what he was
six years. In October 1993, Costco merged with
saying was no big deal.3 He came across as kind yet
Price Club. Jim Sinegal became CEO of the
stern, but he was prone to display irritation when he merged company, presiding over 206
disagreed sharply with what people were saying to
PriceCostco locations, with total annual sales of him.
$16 billion. Jeff Brotman, who had functioned as
In touring a Costco store with the local store
Costco’s chairman since the company’s founding,
manager, Sinegal was very much the person-incharge.
became vice chairman of PriceCostco in 1993 and He functioned as producer, director, and
was elevated to chairman of the company’s
knowledgeable critic. He cut to the chase quickly,
board of directors in December 1994, a position
exhibiting intense attention to detail and pricing,
he held until his unexpected death in 2017.
wandering through store aisles firing a barrage of
In January 1997, after the spin-off of most of
questions at store managers about sales volumes and
its non-warehouse assets to Price Enterprises stock levels of particular items, critiquing
Inc., PriceCostco changed its name to Costco
merchandising displays or the position of certain Companies Inc. When the company
products in the stores, commenting on any aspect of
reincorporated from Delaware to Washington in
store operations that caught his eye, and asking
August 1999, the name was changed to Costco
managers to do further research and get back to him Wholesale Corporation. The company’s
with more information whenever he found their
headquarters was in Issaquah, Washington, not
answers to his questions less than satisfying. Sinegal far from Seattle.
had tremendous merchandising savvy, demanded
much of store managers and employees, and definitely
set the tone for how the company operated its
Jim Sinegal’s Leadership Style discounted retailing business. Knowledgeable
Sinegal was far from the stereotypical CEO. He
observers regarded Jim Sinegal’s merchandising
dressed casually and unpretentiously, often
expertise as being on a par with Walmart’s legendary
going to the office or touring Costco stores founder, Sam Walton.
wearing an opencollared cotton shirt that came
In September 2011, at the age of 75, Jim Sinegal
from a Costco bargain rack and sporting a
informed Costco’s Board of Directors of his intention to
standard employee name tag that said, simply,
step down as CEO of the company effective January
“Jim.” His informal dress and unimposing
2012. The Board elected Craig Jelinek, Costco’s
appearance made it easy for Costco shoppers to
President and Chief Operating Officer since February
mistake him for a store clerk. He answered his
2010, to succeed Sinegal and hold the titles of both lOMoARcPSD| 49551302
President and CEO. At the time, Jelinek was a highly
in Spain, and one each in Iceland, France, and China.
experienced retail executive with 37 years in the
Costco also operated e-commerce sites in the United
industry, 28 of them at Costco, where he started as one
States, Canada, the United Kingdom, Mexico, Korea,
of the Company’s first warehouse managers in 1984.
Taiwan, Japan, and Australia; e-commerce sales
He had served in every major role related to Costco’s
represented about four percent of total net sales in
business operations and merchandising activities
2019. Over 100 million cardholders were entitled to
during his tenure. When he stepped down as CEO,
shop at Costco as of January 2020; in fiscal year 2019,
Sinegal retained his position on the company’s Board
membership fees generated over $3.35 billion in
of Directors and, at the age of 79, was reelected to
revenues for the company. Headed into 2020, shopper
another three-year term on Costco’s board in
traffic at Costco’s warehouse locations averaged over
December 2015; he retired from Costco’s Board at the
3.1 million members per day. Annual sales per store
end of his term in January 2018.
averaged about $190 million ($3.7 million per week) in
2019, an amount that was 93 percent higher than the
$98.2 million per year and $1.9 million per week COSTCO WHOLESALE
averages for Sam’s Club, Costco’s chief competitor. In
2019, Costco was the only national retailer in the IN
history of the United States that could boast of average
annual revenue in excess of $190 million per location.
In April 2020, Costco was operating 787 warehouses,
Exhibit 1 contains a financial and operating
including 547 in the United States and Puerto Rico, 100
summary for Costco for fiscal years 2016 through 2019.
in Canada, 39 in Mexico, 29 in the United Kingdom, 26
in Japan, 16 in Korea, 13 in Taiwan, 12 in Australia, two EXHIBIT
Selected Financial and Operating Data for Costco Wholesale Corp., Fiscal
Years 2016–2019 ($ in millions, except for per share data) Fiscal Years Ending
Selected Income Statement Data Sept. , Sept. , Sept. , Aug. , lOMoARcPSD| 49551302
Net sales $ , $ , $ , $ , Membership fees , , , , Total revenue , , , , Operating expenses Merchandise costs , , , ,
Selling, general and administrative , , , , Preopening expenses
P rovision for impaired assets and store closing costs — — — — Total operating expenses , , , , Operating income , , , , Other income (expense) Interest expense ( ) ( ) ( ) ( )
Interest income and other, net Income before income taxes Provision for income taxes
Net income attributable to Costco $ , $ , $ , $ , Diluted net income per share $ . $ . $ . $ .
Dividends per share (not including special dividend of $ . in and $ . in ) $ . $ . $ . $ .
Millions of shares used in per share calculations . . . . Fiscal Years Ending Balance Sheet Data Sept. , Sept. , Sept. , Aug. , Cash and cash equivalents $ , $ , $ , $ , Merchandise inventories , , , , Current assets , , , , Current liabilities , , , , Net property and equipment , , , , Total assets , , , ,
Long-term debt, excluding current portion , , , , Stockholders’ equity , , , , Cash Flow Data
Net cash provided by operating activities $ , $ , $ , $ , Warehouse Operations lOMoARcPSD| 49551302
Warehouses in operation at beginning of yeara
N ew warehouses opened (including relocations)
E xisting warehouses closed (including closures due to relocations) ( ) ( ) ( ) ( ) Warehouses at end of year
Net sales per warehouse open at year-end (in millions) $ $ $ $
Average annual growth at warehouses open
more than a year (excluding the impact of
changing gasoline prices and foreign exchange rates) % % % % Members at year-end
Businesses, including add-on members ( s) , , , , Gold Star members ( s) , , , , Total paid members , , , ,
Household cardholders that both business and Gold
Star members were automatically entitled to receive , , , , Total cardholders , , , ,
a At the beginning of Costco’s
fiscal year, the operations of
warehouses in Mexico that were part of a percent-owned joint venture
were consolidated and reported as part of Costco’s total operations.
Note: Some totals may not add due to rounding and to not including some line items of minor significance in the company’s statement of income. Sources: Company -K reports for fiscal years and . COSTCO’S MISSION
In the company’s 2017 Annual Report, Craig Jelinek
elaborated on how environmental sustainability fit into BUSINESS MODEL AND STRATEGY Costco’s mission:
Costco’s stated mission in the membership warehouse
Sustainability to us is remaining a profitable business
business was: “To continually provide our members
while doing the right thing. We are committed to
with quality goods and services at the lowest possible
lessening our environmental impact, decreasing our
prices.”4 However, in a “Letter to Shareholders” in the
carbon footprint, sourcing our products responsibly, and
company’s 2011 Annual Report, Costco’s three top
working with our suppliers, manufacturers, and farmers
to preserve natural resources. This will remain at the
executives—Jeff Brotman, Jim Sinegal, and Craig
forefront of our business practices.6
Jelinek—provided a more expansive view of Costco’s mission, stating:
The centerpiece of Costco’s business model was a
The company will continue to pursue its mission of
powerful value proposition that featured a
bringing the highest quality goods and services to
combination of (1) ultra-low prices on a limited
market at the lowest possible prices while providing
selection of nationally branded and Costco’s private-
excellent customer service and adhering to a strict code
label Kirkland Signature products in a wide range of
of ethics that includes taking care of our employees and
merchandise categories, (2) very good to excellent
members, respecting our suppliers, rewarding our
product quality, and (3) intriguing product selection
shareholders, and seeking to be responsible corporate
that included both everyday items and ongoing special
citizens and environmental stewards in our operations
purchases from a big variety of merchandise suppliers around the world.” 5 lOMoARcPSD| 49551302
that turned shopping at Costco into a money- saving Costco’s Strategy
treasure hunt. Ever since the company’s founding,
Costco management had strived diligently to ensure
The key elements of Costco’s strategy were
that shopping at Costco delivered enough value to
ultralow prices, a limited selection of nationally
keep existing members returning frequently to a
branded and top-quality Kirkland Signature
nearby warehouse and to spur membership growth products covering diverse merchandise
every year, thereby generating high sales volumes and categories, a “treasure hunt” shopping
rapid inventory turnover at each warehouse and
environment that stemmed from a constantly-
creating opportunities to open new warehouses both
changing inventory of about 900 “whilethey-last
domestically and internationally.
specials,” strong emphasis on low operating
Big sales volumes and rapid inventory
costs, and ongoing expansion of its geographic
turnover— when combined with the low network of store locations.
operating costs achieved by volume purchasing,
efficient distribution, and reduced handling of
Pricing Costco’s philosophy was to keep
merchandise in no-frills, selfservice warehouse
customers coming in to shop by wowing them
facilities—enabled Costco to operate profitably at
with low prices and thereby generating big sales
significantly lower gross margins than traditional
volumes. Examples of Costco’s 2015 sales
wholesalers, mass merchandisers, supermarkets,
volumes that contributed to low prices in
and supercenters. Membership fees were a
particular product categories included 156,000
critical element of Costco’s business model
carats of diamonds (up to 400,00 carats in 2019),
because they provided sufficient supplemental
meat sales of $6.4 billion, seafood sales of $1.3
revenues to boost the company’s overall
billion, television sales of $1.8 billion, fresh
profitability to acceptable levels. Indeed, Costco’s
produce sales of $5.8 billion (sourced from 44
revenues from membership fees typically
countries), 83 million rotisserie chickens, 7.9
exceeded 100 percent of the company’s net million tires,
income, meaning that the rest of Costco’s
41 m illion prescriptions, 6 million pairs of
worldwide business operated on a slightly below
glasses, and 128 million hot dog/soda pop
breakeven basis (see Exhibit 1)—which translated
combinations. Costco was the world’s largest into Costco’s prices being exceptionally
seller of fine wines ($965 million out of total
competitive when compared to the prices that
2015 wine sales of $1.7 billion).
Costco members paid when shopping elsewhere.
For many years, a key element of Costco’s
Another important business model element
pricing strategy had been to cap its markup on
was that Costco’s high sales volume and rapid
brand-name merchandise at 14 percent
inventory turnover generally allowed it to sell and
(compared to 25 percent and higher markups for
receive cash for inventory before it had to pay
other discounters and most supermarkets and 50
many of its merchandise vendors, even when
percent and higher markups for department
vendor payments were made in time to take
stores). Markups on Costco’s privatelabel
advantage of early payment discounts. Thus,
Kirkland Signature items were a maximum of 15
Costco was able to finance a big percentage of its
p ercent, but the sometimes fractionally higher
merchandise inventory through the payment
markups still resulted in Kirkland Signature items
terms provided by vendors rather than by having
being priced about 20 percent below comparable
to maintain sizable working capital (defined as
name-brand items. Except for Walmart, Costco’s
current assets minus current liabilities) to enable
prices for fresh foods and grocery items ranged timely payment of suppliers.
20 to 30 percent below of the leading
supermarket chains. Aside from being lower-
priced, Costco’s Kirkland Signature products—
which included vitamins, juice, bottled water,
coffee, spices, olive oil, canned salmon and tuna,
nuts, laundry detergent, baby products, dog lOMoARcPSD| 49551302
food, luggage, cookware, trash bags, batteries,
Wall Street calls for Costco to abandon its ultra-low
wines and spirits, paper towels and toilet paper,
pricing strategy, commenting: “Those people are in the
and clothing— were designed to be of equal or
business of making money between now and next
better quality than national brands.
Tuesday. We’re trying to build an organization that’s
As a result of its low markups, Costco’s prices
going to be here 50 years from now.”10 He went on to
were just fractionally above breakeven levels,
explain why Costco’s approach to pricing would remain
producing net sales revenues (not counting unaltered during his tenure:
membership fees) that exceeded all operating
When I started, Sears, Roebuck was the Costco of the
expenses by only $1.0 b illion to $1.4 billion in
country, but they allowed someone else to come in under
fiscal years 2016–2019. As can be verified from
them. We don’t want to be one of the casualties. We
Exhibit 1, Costco’s revenues from membership
don’t want to turn around and say, “We got so fancy
fees accounted for 69 to 72 percent of the
we’ve raised our prices, and all of a sudden a new
company’s operating profits in fiscal years 2016
competitor comes in and beats our prices.”11
to 2019 and exceeded the company’s net income
after taxes in every fiscal year shown in Exhibit 1
Product Selection Whereas typical supermarkets
except for fiscal year 2019—outcomes that were
stocked about 40,000 items and a Walmart
a direct result of the company’s ultra-low pricing
Supercenter or a SuperTarget might have 125,000 to
strategy and practice of capping the margins on
150,000 items for shoppers to choose from, Costco’s
branded goods at 14 percent and private-label
merchandising strategy was to provide members with goods at 15 percent.
a selection of approximately 3,700 active items that
Jim Sinegal explained the company’s
could be priced at bargain levels and thus provide approach to pricing:
members with significant cost savings. Of these, about
75 percent were quality brand-name products and 25
We always look to see how much of a gulf we can
percent carried the company’s private-label Kirkland
create between ourselves and the competition.
Signature brand. The Kirkland Signature label appeared
So that the competitors eventually say, “These
guys are crazy. We’ll compete somewhere else.”
on everything from men’s dress shirts to laundry
Some years ago, we were selling a hot brand of
detergent, pet food to toilet paper, canned foods to
jeans for $29.99. They were $50 in a department
cookware, olive oil to beer, automotive products to
store. We got a great deal on them and could have
health and beauty aids. According to Craig Jelinek, “The
sold them for a higher price but we went down to
working rule followed by Costco buyers is that all
$29.99. Why? We knew it would create a riot.7 At
Kirkland Signature products must be equal to or better another time, he said:
than the national brands, and must offer a savings to
We’re very good merchants, and we offer value. The
our members.” Management believed that there were
traditional retailer will say: “I’m selling this for $10. I
opportunities to increase the number of Kirkland
wonder whether we can get $10.50 or $11.” We say:
Signature selections and gradually build sales
“We’re selling this for $9. How do we get it down to $8?”
penetration of Kirkland-branded items to at least 30
We understand that our members don’t come and shop
percent of total sales—in 2018 Kirklandbrand sales
with us because of the window displays or the Santa
exceeded 28 percent of total sales. Costco executives
Claus or the piano player. They come and shop with us
in charge of sourcing Kirkland Signature products
because we offer great values.8
constantly looked for ways to make all Kirkland
Indeed, Costco’s markups and prices were so
Signature items better than their brand name
fractionally above the level needed to cover
counterparts and even more attractively priced. Costco
companywide operating costs and interest expenses
members were very much aware that one of the great
that Wall Street analysts had criticized Costco
perks of shopping at Costco was the opportunity to buy
management for going all out to please customers at
top quality Kirkland Signature products at prices
the expense of increasing profits for shareholders. One
substantially lower than name brand products.
retailing analyst said, “They could probably get more
Costco’s product range covered a broad
money for a lot of the items they sell.”9 During his
spectrum— rotisserie chicken, all types of fresh meats,
tenure as CEO, Sinegal had never been impressed with
seafood, fresh and canned fruits and vegetables, paper lOMoARcPSD| 49551302
products, cereals, coffee, dairy products, cheeses,
growing the selection of organic items. In the
frozen foods, flat-screen televisions, cell phones and
fresh meats category, Costco was pursuing
assorted other electronics products, jewelry, fresh
increased vertical integration, constructing a EXHIBIT
Costco’s Sales by Major Product Category, 2016–2019
Food and Sundries (dry foods, packaged foods, groceries, snack foods, candy, alcoholic and % % % %
nonalcoholic beverages, and cleaning supplies)
Fresh Foods (fresh produce, meats and fish, bakery and deli products), % % % %
Hardlines (major appliances, electronics, health and beauty aids, hardware, office supplies, % % % %
garden and patio, sporting goods, furniture, cameras, and automotive supplies)
Softlines (including apparel, domestics, jewelry, housewares, books, movie DVDs, video % % % %
games and music, home furnishings, and small appliances)
Ancillary (gasoline, pharmacy, food court, optical, one-hour photo, hearing aids, and travel) % % % % Source: Company -K reports, and .
flowers, fine wines, baby strollers, toys and games,
second meat plant in Illinois and a state-of-the-art
musical instruments, ceiling fans, vacuum cleaners,
poultry plant in Nebraska capable of processing 2
books, apparel, cleaning supplies, DVDs, light bulbs,
million chickens per week—in fiscal 2019 Costco
batteries, cookware, electric toothbrushes, vitamins,
warehouses sold almost 100 million rotisserie
office supplies, and home appliances—but the
chickens annually at a very attractive price of
selection in each product category was deliberately
$4.99. A baking commissary had been opened in
limited to fast-selling models, sizes, and colors. Many
Canada that supplied warehouses in much of
consumable products like detergents, canned goods,
Canada and the United States with bread and
office supplies, and soft drinks were sold only in big-
cookie dough for on-premise baking. The
container, case, carton, or multiple-pack quantities. In
approximate percentage of net sales accounted
a few instances, the selection within a product
for by each major category of items stocked by
category was restricted to a single offering. For Costco is shown in Exhibit 2.
example, Costco stocked only a 325-count bottle of
Management believed that Costco’s ancillary
Advil—a size many shoppers might find too large for
offerings gave members reasons to shop at Costco
their needs. Sinegal explained the reasoning behind
more frequently and make Costco more of a one- limited selections:
stop shopping destination. Headed into fiscal
If you had 10 customers come in to buy Advil, how
2020, over 600 warehouses had inside food
many are not going to buy any because you just
courts, pharmacies, photo centers, and optical
have one size? Maybe one or two. We refer to
centers. Costco’s pharmacies were highly
that as the intelligent loss of sales. We are
regarded by members because of the low prices.
prepared to give up that one customer. But if we
The company’s practice of selling gasoline at
had four or five sizes of Advil, as most grocery
discounted prices (often as much as 20 to 30
stores do, it would make our business more
cents per gallon) at those store locations where
difficult to manage. Our business can only
there was sufficient space to install gas pumps
succeed if we are efficient. You can’t go on selling
at these margins if you are not.12
had boosted the frequency with which nearby
members shopped at Costco and made in-store
In the last several years, organics had become
purchases (only members were eligible to buy
a fast-growing category in both the fresh produce
gasoline at Costco’s stations). Almost all new
section and the grocery items section, and Costco
Costco locations in the United States and Canada
buyers were devoting increased attention to
were opening with gas stations; globally, gas lOMoARcPSD| 49551302
stations were being added at locations where
buyers searched for opportunities to source such items
local regulations and space permitted. Costco
legally on the gray market from other wholesalers or
operated 593 gas stations as of September 2019;
distressed retailers looking to get rid of excess or slow-
the steep discounts on gasoline generated about selling inventory.
11 percent of Costco’s total net sales in fiscal
Management believed that these practices kept its
2019 (Costco did not sell gasoline in South Korea,
marketing expenses low relative to those at typical France, or China).13
retailers, discounters, and supermarkets.
Treasure-Hunt Merchandising While Costco’s
Low-Cost Emphasis Keeping operating costs at a bare
product line consisted of approximately 3,700
minimum was a major element of Costco’s strategy and
active items, some 20 to 25 percent of its product
a key to its low pricing. As first explained by Jim Sinegal
offerings were constantly changing. Costco’s
and later reiterated by Craig Jelinek:
merchandise buyers were continuously making
one-time purchases of items that would appeal
Costco is able to offer lower prices and better values by
eliminating virtually all the frills and costs historically
to the company’s clientele and likely to sell out
associated with conventional wholesalers and retailers,
quickly. A sizable number of these featured
including salespeople, fancy buildings, delivery, billing,
specials were high-end or luxurybrand products
and accounts receivable. We run a tight operation with
that carried big price tags; examples included
extremely low overhead which enables us to pass on
$1,000 to $4,500 big-screen TVs, $800 espresso
dramatic savings to our members. 14
machines, expensive jewelry and diamond rings
(priced from $10,000 to $400,000+), Omega
While Costco management made a point of
watches, Waterford Crystal, exotic cheeses,
locating warehouses on high-traffic routes in or near
Coach bags, cashmere sports coats, $1,500 digital
upscale suburbs that were easily accessible by small
pianos, $800 treadmills, $2,500 memory foam
businesses and residents with above-average incomes,
mattresses, and Dom Perignon champagne.
it avoided prime real estate sites in order to contain
Many of the featured specials came and went land costs.
quickly, sometimes in several days or a week—
Because shoppers were attracted principally by
like Italian-made Hathaway shirts priced at
Costco’s low prices and merchandise selection, most
$29.99 and $800 leather sectional sofas. The
warehouses were of a metal pre-engineered design,
strategy was to entice shoppers to spend more
with concrete floors and minimal interior décor. Floor
than they might by offering irresistible deals on
plans were designed for economy and efficiency in use
bigticket items or name-brand specials and,
of selling space, the handling of merchandise, and the
further, to keep the mix of featured and treasure-
control of inventory. Merchandise was often stored on
hunt items constantly changing so that bargain-
racks above the sales floor and/ or displayed on pallets
hunting shoppers would go to Costco more
containing large quantities of each item, thereby
frequently rather than only for periodic “stock
reducing labor required for handling and stocking. In- up” trips.
store signage was done mostly on laser printers; there
Costco members quickly learned that they
were no shopping bags at the checkout counter—
needed to go ahead and buy treasure-hunt
merchandise was put directly into the shopping cart or
specials that interested them because the items
sometimes loaded into empty boxes. Costco
would very likely not be available on their next
warehouses ranged in size from 73,000 to 205,000 shopping trip.
square feet; the average size was about 146,000 square
In many cases, Costco did not obtain its upscale
feet. Newer units were usually in the 150,000- to
treasure hunt items directly from high-end
205,000-square-foot range, but the world’s largest
manufacturers like Calvin Klein or Waterford (who
Costco warehouse was a 235,000 square-foot store in
were unlikely to want their merchandise marketed at
Salt Lake City that opened in 2015.
deep discounts at places like Costco); rather, Costco
Warehouses generally operated on a seven- closing hours on the weekend; the gasoline operations day,
70-hour week, typically being open between outside many stores usually had extended hours. The lOMoARcPSD| 49551302
10:00 a.m. and 8:30 p.m. weekdays, with earlier
shorter hours of operation as compared to those of EXHIBIT
Images of Costco’s Warehouses
Source: Supplied by Costco and used with Costco’s permission.
Image Courtesy of Costco Wholesale
Felix Mizioznikov/Shutterstock
Image Courtesy of Costco Wholesale
Image Courtesy of Costco Wholesale
Image Courtesy of Costco Wholesale
Image Courtesy of Costco Wholesale
traditional retailers, discount retailers, and
controlling the entrances and exits of its
supermarkets resulted in lower labor costs
warehouses and using a membership format,
relative to the volume of sales. By strictly lOMoARcPSD| 49551302
Costco had inventory losses (shrinkage) well
“hot deals” and other special promotional
below those of typical retail operations.
offerings and sales events at warehouses,
occasional direct mail to prospective new
Growth Strategy Costco’s growth strategy was
members, and regular direct marketing programs
to increase sales at existing stores by five percent
(such as The Costco Connection, a magazine
or more annually and to open additional
published for members), in-store product warehouses, both domestically and
sampling, and special campaigns for new
internationally. Average annual growth at stores warehouse openings.
open at least a year was 10 percent in fiscal 2011,
For new warehouse openings, marketing teams
six percent in both fiscal 2013 and 2014, seven
personally contacted businesses in the area that were
percent in fiscal 2015, four percent in 2016 and
potential wholesale members; these contacts were
2017, seven percent in 2018, and six percent in
supplemented with direct mailings during the period 2019.
immediately prior to opening. Potential Gold Star
Costco had been aggressive in opening new
(individual) members were contacted by direct mail or
warehouses and entering new geographic areas.
by promotions at local employee associations and
As of December 2000, the Company operated a
businesses with large numbers of employees. After a
chain of 349 warehouses in 32 states (251
membership base was established in an area, most
locations), nine Canadian provinces (59
new memberships came from word of mouth (existing
locations), the United Kingdom (11 locations,
members telling friends and acquaintances about their
through an 80 percentowned subsidiary), South
shopping experiences at Costco), follow-up messages
Korea (four locations), Taiwan (three locations,
distributed through regular payroll or other
through a 55 percent-owned subsidiary), and
organizational communications to employee groups,
Japan (two locations), as well as 19 warehouses
and ongoing direct solicitations to prospective business
in Mexico through a 50 percent joint venture and Gold Star members.
partner. Ten years later, in December 2010,
Costco was operating 585 warehouses in 42
states (425 locations), nine Canadian provinces Website Sales
(80 locations), Mexico (32 locations), the United
Costco operated websites in the United States, Canada,
Kingdom (22 locations), Japan (nine locations),
Mexico, the United Kingdom, Taiwan, and South South Korea
Korea—both to enable members to shop for many in-
(seven locations), Taiwan (six locations), and
store products online and to provide members with a
Australia (one location). Some nine years and
means of obtaining a much wider variety of value-
three months later, Costco had opened an
priced products and services that were not practical to
additional 203 warehouses, had 546 warehouses
stock at the company’s warehouses. New websites in
in 45 states, and 236 warehouses in 11 countries,
Japan and Australia were expected to be operational by
including a recentlyopened warehouse in
early 2020. Craig Jelinek was committed to a website Shanghai, China.
strategy that provided exceptional service and value to
Exhibit 4 shows a breakdown of Costco’s
Costco members who wanted to shop online. In recent
geographic operations for fiscal years 2017–
years, online merchandise offerings had expanded 2019.
significantly, and the company was continuously
exploring opportunities to deliver added value to
members via a broader array of online offerings. Marketing and Advertising
Examples of value-priced items that members could
Costco’s low prices and its reputation for making
buy online included sofas, beds, mattresses,
shopping at Costco something of a treasure-hunt
entertainment centers and TV lift cabinets, outdoor
made it unnecessary to engage in extensive
furniture, office furniture, kitchen appliances, billiard
advertising or sales campaigns. Marketing and
tables, and hot tubs. Members could also use the
promotional activities were generally limited to
company’s websites for such services as digital photo
monthly coupon mailers to members, periodic e-
processing, prescription fulfillment, travel, the Costco
mails to members from Costco.com publicizing auto lOMoARcPSD| 49551302 EXHIBIT
Selected Geographic Operating Data, Costco Wholesale
Corporation, Fiscal Years 2017–2019 ($ in millions) United States Canadian Other Operations Operations International Total Year Ended September ,
Total revenue (including membership fees) $ , $ , $ , $ , Operating income , , Capital expenditures , ,
Number of warehouses (as of September , ) Year Ended September ,
Total revenue (including membership fees) $ , $ , $ , $ , Operating income , , Capital expenditures , ,
Number of warehouses (as of September , ) Year Ended September ,
Total revenue (including membership fees) $ , $ , $ , $ , Operating income , , Capital expenditures , ,
Number of warehouses (as of September )
Note: The dollar numbers shown for the “Other International” categories represent only Costco’s ownership share, since all foreign operations were
joint ventures (although Costco was the majority owner of these ventures). Countries with warehouses in the Other International category at the end of fiscal
included Mexico, United Kingdom, Japan, South Korea, Taiwan, Australia, Spain, Iceland, France, and China; Costco’s two
warehouses in Puerto Rico were included in the United States Operations category. Source: Company -K reports, – .
sales accounted for four percent of Costco’s total net
sales in fiscal 2019, versus three percent in 2014.
In 2017, Costco made improvements in website
program (for purchasing selected new vehicles with
functionality, search capability, checkout, and delivery
discount prices through participating dealerships), and
times. New offerings were added at Costco Travel, and
other membership services. In 2018, Costco sold the company introduced hotel-only booking
650,000 vehicles through its 3,000 dealer partners (up
reservations. Costco Travel’s rental car rates were
25 percent over the 520,000 vehicles sold in 2017); the
consistently some of the lowest in the marketplace and
big attraction to members of buying a new or used
in 2017 car rentals became available to members in
vehicle through Costco’s auto program was being able
Canada and the United Kingdom. Additionally, the
to skip the hassle of bargaining with the dealer over
annual two percent reward for Executive members was
price and, instead, paying an attractively low price pre-
extended to apply to Costco Travel purchases in the
arranged by Costco. At Costco’s online photo center,
United States and Canada. Lastly, the company
customers could upload images and pick up the prints
launched Costco Grocery, a two-day delivery on dry
at their local warehouse in little over an hour. Website
grocery items, and a same-day delivery offering both lOMoARcPSD| 49551302
fresh and dry grocery items through partnering with
manufacturers and vendors on a one-time or Instacart.
ongoing basis. No one manufacturer supplied a
In 2018, Costco began opening business
significant percentage of the merchandise that
centers in selected warehouses; at the end of
Costco stocked. Costco had not experienced
fiscal 2019, it had opened 18 business centers in
difficulty in obtaining sufficient quantities of
the United States and two in Canada. As many as
merchandise, and management believed that if
40 new business centers were planned for 2020.
one or more of its current sources of supply
became unavailable, the company could switch
its purchases to alternative manufacturers Supply Chain and Distribution
without experiencing a substantial disruption of
Costco bought the majority of its merchandise its business.
directly from manufacturers, routing it either
directly to its warehouse stores or to one of the
Costco’s Membership Base and
company’s crossdocking depots that served as
distribution points for nearby stores and for Member Demographics
shipping orders to members making online
Costco attracted the most affluent customers in
purchases. In 2018, Costco had more than 20
discount retailing—the average annual income of
geographically-scattered cross-docking depots
Costco members was approximately $100,000 (in
with a combined space exceeding 11 million
2015 Costco management believed the 8.6 m
square feet in the United States, Canada, and
illion subscribers to the company’s monthly
various other international locations. Depots
Costco Connection magazine had an average received container-based shipments from
annual income of $156,000).15 Many members
manufacturers, transferred the goods to pallets,
were affluent urbanites, living in nice
and then shipped full-pallet quantities of several
neighborhoods not far from Costco warehouses.
types to goods to individual warehouses via rail or
One loyal Executive member, a criminal defense
semi-trailer trucks, generally in less than 24 hours.
lawyer, said, “I think I spend over $20,000 to
This maximized freight volume and handling
$25,000 a year buying all my products here from
efficiencies. Depots were also used to ship bulky
food to clothing—except my suits. I have to buy
merchandise to members that had been ordered
them at the Armani stores.”16 Another Costco
online; members often picked up online orders
loyalist said, “This is the best place in the world.
that would fit in their vehicles at nearby
It’s like going to church on Sunday. You can’t get warehouses.
anything better than this. This is a religious
When merchandise arrived at a warehouse, experience.”17
forklifts moved the full pallets straight to the
Costco had two primary types of memberships:
sales floor and onto racks and shelves (without
Business and Gold Star (individual). Business
the need for multiple employees to touch the
memberships were limited to businesses, but included
individual packages/ cartons on the pallets)—the
individuals with a business license, retail sales license,
first time most items were physically touched at
or other evidence of business existence. A business
a warehouse was when shoppers reached onto
membership also included a free household card (a
the shelf/rack to pick it out of a carton and put it
significant number of business members shopped at
into their shopping cart. Very little incoming
Costco for their personal needs). Business members
merchandise was stored in locations off the sales
also had the ability to purchase “add-on” membership
floor in order to minimize receiving and handling
cards for up to six partners or associates in the costs.
business. Costco’s current annual fee for Business and
Costco had direct buying relationships with
Gold Star memberships was $60 in the United States
many producers of national brand-name
and Canada and varied by country in its Other
merchandise and with manufacturers that
International operations. Individuals in the United
supplied its Kirkland Signature products. Costco’s
States and Canada who did not qualify for business
merchandise buyers were always alert for
membership could purchase a Gold Star membership,
opportunities to add products of top quality lOMoARcPSD| 49551302
which included a household card for another family
2.4 million new credit cards) were opened. The
member (additional add-on cards could not be
enhanced cashback Visa Anywhere rewards included
purchased by Gold Star members). All types of
earning four percent on gas; three percent on
members (including household card members) could
restaurant, hotel, and eligible travel; two percent at shop at any Costco warehouse.
Costco and Costco.com; and one percent on all other
Business, Business add-on, and Gold Star members
purchases, exceeding the company’s previous co-
in the United States and Canada could upgrade to
branded credit card offering with American Express.
Executive membership for an additional $60 (an annual
Executive Members using the new Visa Anywhere card
membership fee of $120); upgrade fees to Executive
continued to earn a two percent rebate on qualified
memberships elsewhere varied by country. The purchases.
primary appeal of upgrading to Executive membership
Costco accepted merchandise returns when
was eligibility for a two percent annual reward (rebate)
members were dissatisfied with their purchases. Losses
on qualified pre-tax purchases. Reward certificates
associated with dishonored checks were minimal
were issued annually and could be used toward
because any member whose check had been
purchases of most merchandise at the front-end
dishonored was prevented from paying by check or
registers of Costco warehouses—rebate awards could
cashing a check at the point of sale until restitution was
not be used to purchase alcohol and tobacco products,
made. The membership format facilitated strictly
gasoline, postage stamps, and food court items. The
controlling the entrances and exits of warehouses,
two percent rebate for Executive members was capped
resulting in limited inventory losses of less than
at $1,000 for any 12-month period in the United States
twotenths of one percent of net sales—well below
and Canada (equivalent to annual qualified pre-tax
those of typical discount retail operations.
purchases of $50,000); the maximum rebate varied in Warehouse Management
other countries. Executive members also were eligible
Costco warehouse managers were delegated
for savings and benefits on various business and
considerable authority over store operations. In
consumer services offered by Costco, including
effect, warehouse managers functioned as
merchant credit card processing, small-business loans,
entrepreneurs running their own retail operation.
auto and home insurance, long-distance telephone
They were responsible for coming up with new
service, check printing, and real estate and mortgage
ideas about what items would sell in their stores,
services; these services were mostly offered by third-
effectively merchandising the ever-changing
party providers and varied by state—Executive lineup of treasure-hunt products, and
members did not receive two percent rebate credit on
orchestrating in-store product locations and
purchases of these ancillary services. In fiscal 2019,
displays to maximize sales and quick turnover. In
Executive members represented 39 p ercent of
experimenting with what items to stock and what
Costco’s cardholders (including add-ons, but not
in-store merchandising techniques to employ,
holders of household cards) and accounted for
warehouse managers had to know the clientele
approximately two-thirds of total company sales.
who patronized their locations—for instance, big-
Costco’s member renewal rate was 91 percent in the
ticket diamonds sold well at some warehouses
United States and Canada, and 88 percent on a
but not at others. Costco’s best managers kept
worldwide basis at the end of fiscal 2019. Recent
their finger on the pulse of the members who
trends in membership are shown at the bottom of
shopped their warehouse location to stay in sync Exhibit 1.
with what would sell well, and they had a flair for
In general, with variations by country, Costco
creating a certain element of excitement, hum,
members could pay for their purchases with certain
and buzz in their warehouses. Such managers
debit and credit cards, co-branded Costco credit cards,
spurred above-average sales volumes—sales at
cash, or checks; in the United States and Puerto Rico,
Costco’s top-volume warehouses ran about $5
members could use a co-branded Citi/ Costco Visa
million to $7 million a week, with sales exceeding
Anywhere credit card for purchases at Costco and
$1 million on many days. Successful managers
elsewhere, Costco Cash cards, and all Visa cards. Since
also thrived on the rat race of running a high-
the June 2016 launch of Citi/ Costco Visa® Anywhere
Card, 1.8 million new member accounts (approximately lOMoARcPSD| 49551302
traffic store and solving the inevitable crises of the
the date of hire. Full-time hourly employees were moment.
eligible for benefits on the first day of the second
month after completing 250 eligible paid hours;
part-time hourly employees became benefit- Compensation and
eligible on the first day of the second month after Workforce Practices
completing 450 eligible paid hours. The benefit
package included the following:
As of September 2019, Costco had 149,000
fulltime employees and 105,000 part-time employees. Approximately 16,000 hourly
• Health care plans for full-time and part-time
employees at locations in California, Maryland,
employees that included coverage for mental
New Jersey, and New York, as well as at one illness, substance abuse, and professional
warehouse in Virginia, were represented by the
counseling for assorted personal and family issues.
International Brotherhood of Teamsters. All
• A choice of a core dental plan or a premium dental
remaining employees were non-union. plan.
In March 2019, Costco raised its minimum
wage for hourly employees to $15 per hour and
• A pharmacy plan that entailed (1) co-payments of $3
also bumped up pay scales for a variety of other
for generic drugs and $10 to $50 for brandname
jobs, including supervisory positions. Hourly pay
prescriptions filled at a Costco warehouse or online
scales for warehouse jobs ranged from $15 to $19
pharmacy and (2) co-payments of $15 to $50 for
in the second half of 2019. The highest paid full-
generic or brand-name prescriptions filled at all
time warehouse employees could earn close to other pharmacies.
$25.00 per hour after four years. Front-end
• A vision program that paid up to $60 for a refraction
supervisors averaged about $26 per hour.
eye exam (the amount charged at Costco’s Optical
Compensation averaged $16-$18 per hour for
Centers) and had $175 annual allowances for the
pharmacy technicians and $62.56 per hour for
purchase of glasses and contact lenses at Costco
licensed pharmacists., and about $146,000
Optical Centers. Employees located more than 25
annually for pharmacy managers.18
miles from a Costco Optical Center could visit any
Salaried Costco employees earned anywhere
provider of choice for annual eye exams and could
from $30,000 to close to $200,000 annually,
purchase eyeglasses from any in-network source
depending on job type.19 For example, salaries
and submit claim forms for reimbursement. for merchandise managers, membership
• A hearing aid benefit of up to $1,750 every four
managers, and meat department managers
years (available only to employees and their eligible
reportedly were in the $55,000 to $85,000 range;
dependents enrolled in a Costco medical plan, and
salaries for supervisors ranged from $45,000 to
the hearing aids had to be supplied at a Costco
$75,000; salaries for database, computer Hearing Aid Center). systems, and software applications
• A 401(k) plan open to all employees who had
developers/analysts/project managers were in
completed 90 days of employment. Costco matched
the $85,000 to $125,000 range. Average salaries
hourly employee contributions by 50 cents on the
for pharmacy managers were in the $146,000
dollar for the first $1,000 annually (the maximum
range. Average total compensation (including
company match was $500 per year). The company’s
bonuses) for assistant general managers of
union employees on the West Coast qualified for
warehouses ranged from $78,000 to $97,000 and
matching contributions of 50 cents on the dollar up
reportedly averaged about $88,000.20 Average
to a maximum company match of $250 a year. In
total pay for general managers of warehouses
addition to the matching contribution, Costco also
ranged from $90,000 to $180,000 and reportedly
normally made a discretionary contribution to the averaged about $135,000.21
accounts of eligible employees based on the
Employees enjoyed the full spectrum of
number of years of service with the company (or in
benefits. Salaried employees were eligible for
the case of union employees based on the straight-
benefits on the first of the second month after
time hours worked). For other than union lOMoARcPSD| 49551302
employees, this discretionary contribution was a
Good wages and benefits were said to be why
percentage of the employee’s compensation that
employee turnover at Costco typically averaged about
ranged from a low of three percent (for employees
5 percent or less after the first year of employment.
with one to one years of service) to a high of nine
Some Costco employees had been with the company
percent (for employees with 25 or more years of
since its founding in 1983. Many others had started
service). Company contributions to all the various
working part-time at Costco while in high school or
employee 410(k) plans were $489 million in 2016,
college and opted to make a career at the company.
$543 million in 2017, $578 million in 2018, and $614
One Costco employee told an ABC 20/20 reporter, “It’s million in 2019.
a good place to work; they take good care of us.”24 A
• A dependent care reimbursement plan in which
Costco vice president and head baker said working for
Costco employees whose families qualified could
Costco was a family affair: “My whole family works for
pay for day care for children under 13 or adult day
Costco, my husband does, my daughter does, my new
care with pretax dollars and realize savings of
son-in-law does.”25 Another employee, a receiving
anywhere from $750 to $2,000 per year.
clerk who made about $40,000 a year, said, “I want to
retire here. I love it here.”26 An employee with over two
• Long-term and short-term disability coverage.
years of service could not be fired without the approval
• Generous life insurance and accidental death and of a senior company officer.
dismemberment coverage, with benefits based on
years of service and whether the employee worked
Selecting People for Open Positions Costco’s top
full-time or part-time. Employees could elect to
management wanted employees to feel that they
purchase supplemental coverage for themselves,
could have a long career at Costco. It was company
their spouses, or their children.
policy to fill the vast majority of its higher-level
openings by promotions from within; at one recent
• An employee stock purchase plan allowing all
point, the percentage ran close to 98 percent, which
employees to buy Costco stock via payroll deduction
meant that the majority of Costco’s management team
so as to avoid commissions and fees. members (including warehouse, merchandise,
administrative, membership, front end, and receiving
Although Costco’s longstanding practice of paying
managers) had come up through the ranks. Many of
good wages and good benefits was contrary to
the company’s vice presidents had started in entrylevel
conventional wisdom in discount retailing, cofounder
jobs. According to Jim Sinegal, “We have guys who
and former CEO Jim Sinegal, who originated the
started pushing shopping carts out on the parking lot
practice, firmly believed that having a well-
for us who are now vice presidents of our company.”27
compensated workforce was very important to
Costco made a point of recruiting at local universities;
executing Costco’s strategy successfully. He said,
Sinegal explained why: “These people are smarter than
“Imagine that you have 120,000 loyal ambassadors out
the average person, hardworking, and they haven’t
there who are constantly saying good things about
made a career choice.”28 On another occasion, he said,
Costco. It has to be a significant advantage for you. . . .
“If someone came to us and said he just got a master’s
Paying good wages and keeping your people working
in business at Harvard, we would say fine, would you
with you is very good business.”22 When a reporter
like to start pushing carts?”29 Those employees who
asked him about why Costco treated its workers so well
demonstrated smarts and strong people management
compared to other retailers ( particularly Walmart,
skills moved up through the ranks.
which paid lower wages and had a skimpier benefits
But without an aptitude for the details of
package), Sinegal replied: “Why shouldn’t employees discount retailing, even up-and-coming
have the right to good wages and good careers. . . . It
employees stood no chance of being promoted to
absolutely makes good business sense. Most people
a position of warehouse manager. Top Costco
agree that we’re the lowest-cost producer. Yet we pay
executives who oversaw warehouse operations
the highest wages. So it must mean we get better
insisted that candidates for warehouse managers
productivity. Its axiomatic in our business— you get
be top-flight merchandisers with a gift for the what you pay for.”23
details of making items fly off the shelves. Based
on his experience as CEO, Sinegal said, “People lOMoARcPSD| 49551302
who have a feel for it just start to get it. Others,
However, while executive salaries and
you look at them and it’s like staring at a blank
bonuses were modest in comparison with those
canvas. I’m not trying to be unduly harsh, but
at other companies Costco’s size, Costco did
that’s the way it works.”30 Most newly appointed
close the gap via an equity compensation
warehouse managers at Costco came from the
program that featured awarding restricted stock
ranks of assistant warehouse managers who had
units (RSUs) to executives based on defined
a track record of being shrewd merchandisers and
performance criteria. The philosophy at Costco
tuned into what new or different products might
was that equity compensation should be the
sell well given the clientele that patronized their
largest component of compensation for all
particular warehouse. Just having the requisite
executive officers and be tied directly to
skills in people management, crisis management,
achievement of pre-tax income targets.
and cost-effective warehouse operations was not enough.
Costco’s Business Philosophy,
Executive Compensation Executives at Costco
did not earn the outlandish salaries that had Values, and Code of Ethics
become customary over the past decade at most
Jim Sinegal, who was the son of a steelworker,
large corporations. In Jim Sinegal’s last two years
had ingrained five simple and down-to-earth
as Costco’s CEO, he received a salary of $350,000
business principles into Costco’s corporate
and a bonus of $190,400 in fiscal 2010 and a salary
culture and the manner in which the company
of $350,000 and a bonus of $198,400 in fiscal
operated. The following are excerpts of these
2011. Craig Jelinek’s salary as President and CEO
principles and operating approaches:33
in fiscal 2019 was $930,000 (which was increased
to $1 million for calendar year 2019), and he
1. Obey the law—The law is irrefutable! Absent a
received a bonus of $190,400 and a stock award
moral imperative to challenge a law, we must
worth $6.7 million; Richard Galanti’s salary as
conduct our business in total compliance with the
Executive Vice-President and Chief Financial
laws of every community where we do business. We
Officer in fiscal 2019 was $784,146, and he pledge to:
received a bonus of $76,160 and a stock award
• Comply with all laws and other legal
worth nearly $3.2 million. Other Costco executive requirements.
officers received salaries in the $662,000 to
• Respect all public officials and their positions.
$737,000 range, bonuses of about $76,000, and
stock awards worth nearly $3.2 million in fiscal
• Comply with safety and security standards for all 2019. products sold.
Asked why executive compensation at
• Exceed ecological standards required in every
Costco was only a fraction of the amounts
community where we do business.
typically paid to top-level executives at other
• Comply with all applicable wage and hour laws.
corporations with revenues and operating scale
• Comply with all applicable antitrust laws.
comparable to Costco’s, Sinegal replied: “I
• Conduct business in and with foreign countries in
figured that if I was making something like 12
a manner that is legal and proper under United
times more than the typical person working on States and foreign laws.
the floor, that that was a fair salary.”31 To another
reporter, he said: “Listen, I’m one of the founders
• Not offer, give, ask for, or receive any form of
of this business. I’ve been very well rewarded. I
bribe or kickback to or from any person or pay to
don’t require a salary that’s 100 times more than
expedite government action or otherwise act in
the people who work on the sales floor.”32 During
violation of the Foreign Corrupt Practices Act or
his tenure as CEO, Sinegal’s employment the laws of other countries.
contract was only a page long and provided that • Promote fair, accurate, timely, and
he could be terminated for cause.
understandable disclosure in reports filed with lOMoARcPSD| 49551302
the Securities and Exchange Commission and in • Great benefits.
other public communications by the Company.
• A safe and healthy work environment.
2. Take care of our members—Costco membership is • Challenging and fun work.
open to business owners, as well as individuals. Our • Career opportunities.
members are our reason for being—the key to our
• An atmosphere free from harassment or
success. If we don’t keep our members happy, little discrimination.
else that we do will make a difference. There are
plenty of shopping alternatives for our members,
• An Open-Door Policy that allows access to
and if they fail to show up, we cannot survive. Our
ascending levels of management to resolve
members have extended a trust to Costco by virtue issues.
of paying a fee to shop with us. We will succeed only
• Opportunities to give back to their communities
if we do not violate the trust they have extended to
through volunteerism and fundraising.
us, and that trust extends to every area of our
4. Respect our suppliers—Our suppliers are our business. We pledge to:
partners in business and for us to prosper as a
• Provide top-quality products at the best prices in
company, they must prosper with us. To that end, the market. we strive to:
• Provide high-quality, safe, and wholesome food
• Treat all suppliers and their representatives as
products by requiring that both vendors and
we would expect to be treated if visiting their
employees be in compliance with the highest places of business.
food safety standards in the industry. • Honor all commitments.
• Provide our members with a 100 percent
• Protect all suppliers’ property assigned to Costco
satisfaction guaranteed warranty on every as though it were our own.
product and service we sell, including their
• Not accept gratuities of any kind from a supplier. membership fee.
• If in doubt as to what course of action to take on
• Assure our members that every product we sell is
a business matter that is open to varying ethical
authentic in make and in representation of
interpretations, TAKE THE HIGH ROAD AND DO performance. WHAT IS RIGHT.
• Make our shopping environment a pleasant
experience by making our members feel
If we do these four things throughout our welcome as our guests.
organization, then we will achieve our ultimate goal, which is to:
• Provide products to our members that will be ecologically sensitive.
5. Reward our shareholders—As a company with stock
• Provide our members with the best customer
that is traded publicly on the NASDAQ stock
service in the retail industry.
exchange, our shareholders are our business
• Give back to our communities through employee
partners. We can only be successful so long as we
volunteerism and employee and corporate
are providing them with a good return on the
contributions to United Way and Children’s
money they invest in our company. . . . We pledge Hospitals.
to operate our company in such a way that our
present and future stockholders, as well as our
3. Take care of our employees—Our employees are
employees, will be rewarded for our efforts.
our most important asset. We believe we have the
very best employees in the warehouse club
industry, and we are committed to providing them
with rewarding challenges and ample opportunities
for personal and career growth. We pledge to provide our employees with: • Competitive wages. lOMoARcPSD| 49551302
Environmental Sustainability and
facilities. So far, Costco had found the fuel cells at
test sites had resulted in lower combined power Responsible Sourcing of Meat
and natural gas expenses. The company was also and Dairy Products
exploring use of new HVAC and refrigerant
In recent years, Costco management had
systems that were more energy efficient and
undertaken a series of initiatives to invest in
increasing its use of refrigerants that further
various environmental and energy saving reduced global warming potential and
systems, the use of packaging that could be greenhouse gas emissions.
recycled or composted, reduction of both
Another energy-saving initiative had been to
packaging materials and food waste, greater
install Internet-based energy management
sourcing of sustainable seafood products from
systems at all Costco warehouses in North
wild fisheries and farmed aquaculture, working
America and at some international locations,
with recognized experts and suppliers to increase
giving Costco the ability to regulate energy usage
the percentage of cage-free eggs it sold, and
on an hourly basis. These, along with installation
compliance with best practices in dairy farming,
of LED lighting and warehouse skylights, had
animal care, and animal well-being. The stated
reduced the lighting loads on Costco’s sales floors
objective was to ensure that the company’s
by over 50 percent since 2001. Costco had
carbon footprint grew at a slower rate than the
undertaken a series of initiatives at company
company’s sales growth and that Costco was a
facilities worldwide to reduce water usage,
responsible steward of the animals, land, and
reduce or remove potential chemical harm to
other environmental resources utilized in the
humans and to the environment, use recycled products it sold.
asphalt for paving most warehouse parking lots,
Costco’s metal warehouse design, which
and use best practices to irrigate landscapes and
included use of recycled steel, was consistent
manage groundwater runoff. Empty store
with the requirements of the Silver Level LEED
cartons were given to members to carry their
Standard—the certification standards of the
purchases home. Costco had been an active organization Leadership in Energy and
member of the Environmental Protection
Environmental Design (LEED) were nationally
Agency’s Energy Star and Climate Protection
accepted as a benchmark green building design
Partnerships since 2002 and was a major retailer
and construction. Costco’s recently-developed
of Energy Star qualified compact florescent lamp
non-metal designs for warehouses had resulted in
(CFL) bulbs and LED light bulbs.
the ability to meet Gold Level LEED Standards.
Costco was committed to sourcing all of the
All new facilities were being designed and
seafood it sold from responsible and
constructed to be more energy efficient; this
environmentally sustainable sources that were
included using LED lighting and energy-efficient
certified by the Marine Stewardship Council; in
mechanical systems for heating, cooling, and
no instances did Costco sell seafood species that
refrigeration in both new and existing facilities. In
were classified as environmentally endangered
2016, Costco began retrofitting existing facilities
and it monitored the aquaculture practices of its
with LED lighting; as of year-end fiscal 2018, 1,166
suppliers that farmed seafood. The company had
retrofits had been completed, resulting in a total
long been committed to enhancing the welfare
estimated energy savings of 206 million kilowatt-
and proper handling of all animals used in food
hours per year.34 All lighting in new construction
products sold at Costco. According to the
utilized LED technology. At the end of fiscal 2018,
company’s official statement on animal welfare,
Costco had rooftop solar photovoltaic systems in
“This is not only the right thing to do, it is an
operation at 109 of its warehouses; some
important moral and ethical obligation we owe
warehouses used solar power to light their
to our members, suppliers, and most of all to the
parking lots. In 2017, Costco began piloting the
animals we depend on for products that are sold
use of fuel cells as an alternate source of
at Costco.”35 As part of the company’s
electricity at a handful of locations and was
commitment, Costco had established an animal
continuing to evaluate their use in future
welfare audit program that utilized recognized lOMoARcPSD| 49551302
audit standards and programs conducted by
and BJ’s Wholesale were attractive to small business
trained, certified auditors and that reviewed
owners, individual households (particularly bargain-
animal welfare both on the farm and at
hunters and those with large families), churches and slaughter. nonprofit organizations, caterers, and small
restaurants. The internationally located warehouses
faced similar types of competitors. COMPETITION
Brief profiles of Costco’s two primary competitors
According to IBISWorld, the Warehouse Clubs and
in North America are presented in the following
Supercenters industry—defined as companies that sections.
provided a range of general merchandise including
food and beverages, furniture and appliances, health Sam’s Club
and wellness products, apparel and accessories, fuel
The first Sam’s Club opened in 1984, and Walmart
and ancillary services—was expected to have sales of
management in the ensuing years proceeded to grow
about $514 billion in the United States alone in 2020.36
the warehouse membership club concept into a
There were three main wholesale club competitors—
significant business and major Walmart division. The
Costco Wholesale, Sam’s Club, and BJ’s Wholesale
concept of the Sam’s Club format was to sell
Club. Going into 2020, these three rivals had over 1,600
merchandise at very low profit margins, resulting in low
warehouse locations across the United States and
prices to members. The mission of Sam’s Club was “to
Canada; most every major metropolitan area had one,
make savings simple for members by providing them
if not several, warehouse clubs. The combined 2019
with exciting, quality merchandise and a superior
sales of Costco, Sam’s Club, and BJ’s Wholesale in the
shopping experience, all at a great value.”37 The target
United States and Canada was $224.4 billion. Costco
market at Sam’s Club was small businesses and
had a 68 percent share of warehouse club sales across
suburban families with incomes of $75,000 to
the United States and Canada, with Sam’s Club (a $125,000.
division of Walmart) having just over a 26 percent
In early 2020, Sam’s Club operated 599 locations in
share and BJ’s Wholesale Club and several small
44 states and Puerto Rico, many of which were
warehouse club competitors close to a 6 percent share.
adjacent to Walmart Supercenters, and about 100
Competition among the warehouse clubs was
Sam’s Club locations in Mexico, Brazil, and China.
based on such factors as price, merchandise quality
(Financial and operating data for the Sam’s Club
and selection, location, and member service. However,
locations in Mexico, Brazil, and China were not
warehouse clubs also competed with a wide range of
separately available because Walmart grouped its
other types of retailers, including retail discounters like
reporting of all store operations in 26 countries outside
Walmart and Dollar General, supermarkets, general
the United States into a segment called Walmart
merchandise chains, specialty chains, gasoline stations,
International that did not break out the international
and Internet retailers. Not only did Walmart, the
operations of Sam’s Club.) In fiscal year 2020 (ending
world’s largest retailer, compete directly with Costco
January 31, 2020), the Sam’s Club locations in the
via its Sam’s Club subsidiary, but its Walmart
United States and Puerto Rico and operations at
Supercenters sold many of the same types of
www.samsclub.com had record revenues of
merchandise at attractively low prices as well. Target,
$59.2 billion (including membership fees), making it
Kohl’s, Kroger, and Amazon. com had emerged as
the eighth largest retailer in the United States.
significant retail competitors in certain general
Sam’s Clubs generally ranged between
merchandise categories. Low-cost operators selling a
94,000 and 168,000 square feet, with an average
single category or narrow range of merchandise—such
at the end of fiscal 2020 of approximately 134,000
as Trader Joe’s, Lowe’s, Home Depot, Office Depot,
square feet; several newer locations were as large
Staples, Best Buy, PetSmart, and Barnes & Noble—had
as 190,000 square feet. All Sam’s Club
significant market shares in their respective product
warehouses had concrete floors, sparse décor,
categories. Notwithstanding the competition from
and goods displayed on pallets, simple wooden
other retailers and discounters, the low prices and
shelves, or racks in the case of apparel. In 2009
merchandise selection found at Costco, Sam’s Club,
and 2010, Sam’s Club began a long-term
warehouse remodeling program for its older